Adam Smith's Lost Legacy

Tuesday, July 31, 2007

WSJ in Invisible Hand 'Attrocity'

Wall Street Journal has this tantalising sentence in an article by Thomas F. Siems, called “Friedman's Legacy”.

“Friedman reminded us of the economic principles first outlined by Adam Smith. Take Smith's concept of the "invisible hand," by which individuals, ...”

Yes, that’s all I’ve got of it because the rest is subject to a ‘subscription’. Now as an author I am always conscious of copyright issues, etc., but I would like to read the rest of the sentence and its paragraph for obvious reasons, as my reader will know. So if anybody could supply me with the full paragraph with the sentence, I would be most grateful.

In the meantime, I am savvy enough to know from long experience of this misattribution to Smith of a metamorphosis of a metaphor into a ‘concept’, which he never meant it to be read that way, as my regular reader will know, that I could assume what follows, but scholastic training, and the many occasions when in discourse I have seen people caught for doing just that before falling on their faces, I shall refrain from the temptation, and await some kindly person to send me the paragraph..

That Milton Friedman, of Chicago University fame, was behind the metamorphosis does not surprise me. ‘Chicago’ Adam Smith was created in Milton’s department and replaced the authentic ‘Kirkcaldy’ Adam Smith who wrote the Wealth Of Nations.

One of the many atrocities committed by Chicago and its graduates who spread the word across US campuses, was the myth of the ‘invisible hand’, which some variants transmuted into ‘as if led by an invisible hand’, and most of examples of the myth in currency assert it was, first a ‘concept’, then a ‘theory’ and finally Smith’s most ‘important idea’.

Should my reader wish to have an electronic copy of my recent paper, “Adam Smith’s Invisible Hand: from metaphor to myth”, he or she should let me know by arranging the following words into an address: ‘gavin’, ‘negweb’ and ‘com’ in the usual manner.

In the meantime, you can read what Sam Fleischacker, a professor of philosophy at the nearby University of Illinois, Chicago, has to say on the subject of the ‘invisible hand’ in his book: “On Adam Smith’s Wealth of nations: a philosophical companion”, pp 138-42, Princeton University Press.

Monday, July 30, 2007

No Role for an Invisible Hand in the European Conquest of the Americas

I was checking over a pile of notes as I round off my manuscript on ‘Adam Smith: the moral philosopher and his thinking’ (comments on the proposed title would be welcome, too), and I came across this reference which I looked up to check that my scribble was correct:

‘A project of commerce in the East Indies therefore gave occasion to the discovery of the West. A project of conquest gave occasion to all the establishments of the Spaniards in those newly discovered countries. The motive which excited them to this conquest was a project of gold and silver mines; and a course of accidents, which no human wisdom could foresee, rendered this project much more successful than the undertakers had any reasonable grounds for expecting.’ (Wealth Of Nations IV.vii.b.21: p 564)

CommentThis is most interesting in view of my discourses on the myths of the invisible hand that have appeared of late and which still clutter public claims about Adam Smith. What would a believer in Adam Smith’s ‘theory of the invisible hand’ make of this paragraph?

Would you claim that this is an example of an invisible hand working? If so, it would stretch the invisible hand leading a group of Europeans to sail west for 3,000 miles in search of a route to India and China to break the Venetian monopoly of the eastern spice trade via Egypt; finding a large continent in the way, putting up settlements; behaving as soldiers everywhere at that time behaved, with wanton cruelty, rapine and looting; turning defenceless local inhabitants into slaves to work in the mines; and finally a century or so later, plundering gold and silver and shipping it Spain and then the rest of Europe. If it was a 'blessing in disguise', it was, as Winston Churchill once said, 'well disguised'. Does it sound plausible?

No, I don’t think so.

Is it therefore a ‘linked chain of intermediary events’ that have no end-purpose in sight, which happened as recorded, the consequences of which were not the result of anybody being ‘led’ in any direction. Greed for gold and silver, which are not part of the wealth of a society, a role reserved for the products of land and labour manifested in the ‘necessities, conveniences, and amusements of human life’, caused substantial and shameful human distress and disorder.

Fortunately, in the Northern part of the American continents, no gold or silver was found in the British, Dutch, French and Danish colonies (until the 19th century on the Pacific side of it) and they were built instead on farming, which produced real wealth.

There was also a fair amount over the three centuries following of ‘substantial and shameful human distress and disorder’. But again, there is no role for ‘an invisible hand’ leading humans to found a thriving economy. Smith didn’t claim that there was and he didn’t use the metaphor to describe the ‘intermediate chain of events’.

Sunday, July 29, 2007

Was Adam Smith a Classic Liberal?

The myth of classical liberalism by John Dixon contains the following thoughts:

“So called classical liberals have themselves failed to understand what liberalism truly means by believing that economics and ideology are inseparable or at most one and the same. They see the glorious days of Ricardo, Malthus and Adam Smith as the days of true liberalism, when it meant what it said on the tin. Free trade was the conventional wisdom and the evils of government intervention were negligible. To them this is liberalism, a free market, a small government and the public sorting public problems out themselves. Many within our party (and even more so within the conservative party) would agree. How wrong they all are.”

CommentI shall ignore Malthus and Ricardo's views on the size of government, and concentrate on Adam Smith’s views because his views were somewhat different from Ricardo’s, as was his method of analysis.

For Adam Smith’s days, ‘Free trade was [NOT] the conventional wisdom’. His analysis of mercantile political economy and the behaviours of ‘merchants and manufacturers’ as monopolists and protectionists (I read on a blog recently that we should refer to these people as ‘isolationists’, and I am inclined to agree), showed that Britain was far from a free trade economy in the mid-18th century.

And he was ambivalent about free trade being introduced too quickly because of the disruption that would cause, especially for the working poor, and he supported the Navigation Laws because of the need to defend Britain as an island, dependent on the sea.

In similar vein, ‘the evils of government intervention were [NOT] negligible’. The point about his critique of mercantile political economy was that the government that drove it pursued ‘absurd’ and ‘false’ policies, which intervened in the ‘natural’ process of economic activities (Book IV, Wealth Of Nations].

His agenda for the proper role of government was quite extensive, way beyond images of the minimalist ‘night watchman state’ (Book V). Defence rose from about £5 million to £40 million a year during the 18th century (defence was more important than opulence – without the former you could end up without the latter).

Education, as he envisaged it as a compulsory government–led, but not totally publicly funded service, with a ‘little school in every village, would be an extremely costly addition toe the public budget. Health spending was needed to combat ‘loathsome diseases’ like leprosy, and was itself the beginning of a large increase in the budget.

Public works and public institutions, facilitating commercial activities was probably another object of public spending with enormous potential for substantial budgets as there was hardly a road anywhere in Britain that was not in need of major repair, and when built they would need large annual sums for maintenance, plus bridges, harbours and canals. Cities like London and other large towns needed pavements and street lighting, regular refuse collection, paid for out of local taxation.

Smith recommended that the post office and the bullion mint be run as public services, and also that government administer quality stamping of cloths and assay services. He also saw a role for the government in regulating the banks (though he favoured banks issuing paper currency notes).

The idea that Smith believed that there should be a minimal state-run sector is mythical, though he may not have been comfortable with the proportionate state sectors common today in capitalist economies.

That’s just a few thoughts on John Dixon’s version of Smith’s political economy. If anything Smith was a pre-classical liberal, Malthus, Ricardo and Mill were classical liberals and the profession today is dominated by neoclassical thinking.

The big difference between Smith and those that followed is that he studied the detail of the pre-classical economy and economics slowly drifted to studying abstractions from real economies, until in the neoclassical version they study a completely abstract mathematical version that has no human influence in it whatsoever. That does not make it wrong, but it does make it different.

Posts Resumed

Apologies for no posts yesterday, but my internet connection went down at 7 am while posting a response to a comment on an earlier post and my technical-support team (i.e., my duaghter) was unavailable (she believes in week-ends off). Any way she popped round this morning, so I should be able to post later. Aparently, all it needed was for me to switch the modem off! Simple when you know how...

“If Adam Smith were around today, he would have had to write a separate chapter on global outsourcing. Because it takes importers a long time to find suppliers and to get them up to speed, importers keep their suppliers a secret. The last thing that an importer wants to do is let his competitors know the source of any supply chain advantage he may have. Even when it is in their collective interest to share information, importers keep to themselves.

As a result, factories pay little, if any, reputational cost for production shenanigans. The invisible hand doesn't work well when the manufacturers themselves are unseen.”

[Paul is the founder and president of China Advantage, a services firm that provides outsourcing and supply chain management to U.S. and European companies. He has been involved with China for more than 15 years, and in the course of his manufacturing career, has had dealings with thousands of Chinese factories.]

Comment
As expected an article in Forbes is authoritative and worth reading. And this one is no exception. It is about the perils for US businesses which source off-shore in China. Problems of quality are among the topics and the usual effect of growing trade on improving quality does not work quite like it should. Because US firms keep their import sources secret, a poor-to-bad quality Chinese supplier is not penalised by publicity; it just changes its customers and carries on producing shoddy goods.

US businesses in these conditions need reliable information about the quality standards of Chinese manufacturers, and the author of the article is in that business, running 'China Advantage’. Fine; that’s a useful service and deserves its market niche.

My problem is with the obligatory paragraphs on Adam Smith. That aims to hit the readers'‘recognition’ buttons, fair enough, but happens to be unwarranted. Would Adam Smith need “to write a separate chapter on global outsourcing. Because it takes importers a long time to find suppliers and to get them up to speed…”?

If you think about it, Wealth Of Nations would have to contain a lot of new chapters because the world has moved on through European imperialism, the industrial revolution, the communist failed experiments, and such like. But even in outsourcing, why would it need a new chapter?

Trade over large distances – and trade within Britain in mid-18th century was truly 'distant' – it took three weeks to travel by ‘road’ from Edinburgh to London, which is as long as a factory-to-factory cargo from China to the mid-west or California.

Smith wrote about these and related problems and the perils of distant, including foreign, trade in Wealth Of Nations. If the author had read all of the chapter from which he borrows the metaphor of the ‘invisible hand’ (WN IV.ii. ‘Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home’, pp 452-72), he would have found plenty of comments about the risks, perils and costs of what is called today ‘outsourcing’, a word invented and promoted by those who oppose foreign trade (also known as competition) among businesses, trade unions, tv demagogues and those who fear they are about to fail to be elected.

Hence, when the authorwrites: “The invisible hand doesn't work well when the manufacturers themselves are unseen…”, he misses the reason why domestic merchants prefer the home to foreign trade which was discussed by Adam Smith:

“In the home trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption [importing]. He can know better the character and situation of the persons whom he trusts, and if happens to be deceived, he knows better the laws of the country from which he must seek redress.” (WN IV.ii.6: p 454)

To which part of that sentence would the author add something different? Of course, he could expand it (as I could) but Wealth Of Nations does not need expanding!

A US manufacturer buying in Chinese manufactured parts (computer chips) and being sold duff products, will soon know if her computers don’t work, because her customers will tell her, the trade press will report her quality problems and her customers’ suppliers will cancel orders.

Secrecy about her Chinese supplier becomes irrelevant at the most important level; the US business woman’s loss of business, perhaps terminally. If her testing procedures were operating properly (‘what do you mean she hasn’t got any?) that batch of chips, or whatever else it consists of, would have been rejected.

Similarly if Chinese manufactured chairs collapse, or items do not survive their first wash, or customers suffer from toxic poisoning, or for that matter, US based suppliers act similarly selling down the road or across the states, the US manufacturer suffers legal redress from its customers, plus loss of business.

I think I shall put this author's article down to ‘scare marketing’ of his excellent services. US firms looking at foreign supply chains would do well to call on his services if they are embarking on outsourcing in China, or his equivalents in Indian or European outsourcings. They would be wise also to check carefully a local outsource supply across town. Its called ‘due diligence’ and you don’t need to read Wealth Of Nations to know this in business, though if you do, you’ll find references to it.

PS: There are no invisible hands in markets (see archives for plenty of explanation of Smith’s use of the metaphor).

Thursday, July 26, 2007

Thoughts For Today About Tomorrow

A quotation form Wealth Of Nations of thoughtful interest, written by Adam Smith about the exploration of the Americas and the subsequent treatment of the indigenous inhabitants (formerly migrants from North Asia, c.9,000 year earlier) whose mode of subsistence was primarily low technology hunter-gathering, by the higher technology European migrants from the 15th century onwards:

‘At the particular time when these discoveries were made, the superiority of force happened to be so great on the side of the European, that they were enabled to commit with impunity every sort of injustice in those remote countries. Hereafter, perhaps, the natives of those countries may grow stronger, or those of Europe may grow weaker, and the inhabitants of all the different quarters of the world may arrive at that equality of courage and force, which by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another. But nothing seems more likely to establish this equality of force than that mutual communication of knowledge and of all sorts of improvements which an extensive commerce from all countries to all countries naturally or necessarily, carries along with it.’ (WN IV.vii.c.80: p 626-27)

CommentSmith drew attention of possible long term consequences of those negative aspects of superior force when applied against people who cannot resist.

Hunter-gatherer tribes were no match for Agricultural/commercial societies with their technological superiority and habits of using such force against each other, when they clashed with the pathetic resistance of local inhabitants in colonies thousands of miles from their homelands.

The ‘natives of those countries [have] grow[n] stronger’ and ‘those of Europe [have] grow[n] weaker’, and ‘the inhabitants of all the different quarters of the world [are arriving] at that equality of courage and force, which by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another.’

The working out of this new balance of force in the world is going to be the problem for this 21st century. It looks messy for now.

Let’s hope it doesn’t get much messier, especially with nuclear weapons spreading to more countries.

Wednesday, July 25, 2007

'Emperor' Mugabe's War on Price Inflation and Adam Smith's Theory of Prices

Economics tutors looking for first year in-class assignments (I’ve never been fond of out- of-class assignments because I’m never sure who wrote them) they could visit here and ask the class to discuss the ‘economics’ of Zimbabwe hyper-inflation as represented by a young Zimbabwe ‘journalist and a graduate development studies student writing from Canada”, Kuthula Matshazi, here.

He/she writes “Greed delivers command economy”, of which the gist is that the inflation problems (over 1,000 per cent) are the fault of greedy Zimbabwe businessmen basing their prices on "future inflation forecasts" and, menacingly, ‘untoward speculative behaviour influenced by greed and in some instances economic sabotage’. This leads him/her to advise: ‘It is therefore incumbent upon the government, as a people's representative, to take corrective action against the failure.’

Well, there is plenty more like that as a supporter of the Zimbabwe government, presumably embarrassed by the news coming out of Zimbabwe to the safe environs of Canada, lashes out in apparent total ignorance of the causes of rampant hyper-inflation, way back to Roman times. (Perhaps, he or she is on a government-funded grant paid for his/her ‘good behaviour’.)

Governments cause hyper-inflation by printing the damn money unrelated to any requirements in the economy. If Zimbabwe’s government wants to stop price rises on the scale the country experiences, it should switch off the printing presses.Anyway, the article contains this:

“Correcting a market failure, we must ensure that, firstly, businesses charge natural (equilibrium price) prices. That natural price should also take into consideration what Adam Smith calls the just price - price that everyone would freely agree to if they knew the consequences of the entire price structure. We have to consider the moral price, in this case the just price and indeed the natural price which is determined by the demand and supply equation, labour costs, rent and profit among other factors.”

CommentSmith’s price theory has nothing to do with the medieval idea of the ‘just price’. Smith’s (and others’) idea of the ‘Natural’ price was based on the price that happened to reward the factors land, labour and capital, or ‘neither more nor less’ what it costs to bring the product to market (Wealth Of Nations, pp 72-4).

But the sellers do not determine the price of anything unilaterally; buyers also have an input; they do not have to buy by paying any price that the seller asks or demands in competitive markets. That is why Smith focused on ‘Market’ prices, which are determined by demand and supply.

The idea that buyers would agree to the ‘just price’ if ‘they knew the consequences of the entire price structure’ is absurd. Ask your students: ‘how that would work in a practical sense?’

As for the ‘moral price’, the ‘just price’ and the ‘natural price’, I think there is a lot of confusion here. This is revealed in the statement of Kuthula Matshazi who says that the ‘Natural price’ “which is determined by the demand and supply equation, labour costs, rent and profit among other factors”. Natural prices are not determined by demand and supply equations – except the theoretical coincidence of a particular set of them (to which actual market prices gravitate around but never quite reach). The ‘other factors’ – ‘labour costs, rent and profit’ - are all subject to other prices.

As for Zimbabwe’s government, and its current laws against price increases, which will empty the shops faster, perhaps they (and Kuthula Matshazi) should read up on the Roman Emperor Diocletian, who in 301, tried to cure rampant inflation with an Edict on Maximum Prices, which fixed prices for goods and wages, and imposed the death penalty to merchants who overcharged.

Tuesday, July 24, 2007

A Short Note on Productive and Unproductive Labour

Earlier today I was working on Smithian growth theory and thought a short piece on an aspect of it might be of interest. For simplicity sake, I have not developed the full Smithian growth process (fixed and circulating capital, etc.).

Adam Smith’s separation of productive and unproductive labour has caused much discussion in the distant past, but it is now ignored altogether in neoclassical economics. I think the problem is that people come at it from different perspectives. The most common description of the difference is that of between producing goods or producing services; the former produce tangible products that can be sold later to recover their costs plus a profit; the latter do not produce anything tangible and perish at the moment of their delivery.

This was not quite what Smith meant when providing a singular characteristic of service. True, a product is tangible and a service is not. Labour in both cases receives an income; if the labourer spends all his wages on consumption goods (subsistence wages), his wages become revenue for the producers, who receive their revenue (costs plus profit) from the producers’ productive labour. The suppliers save out of their revenue, which adds to net capital, adding to growth. He also replaces the wage and materials costs of the previous round, plus consumes (frugally or with prodigality?) the rest of his revenue as consumption.

Take a closer look at our author: Smith’s lectures in Edinburgh in 1748-51 paid him £100 a year, a handsome sum compared to his annual stipend of £40 as a Snell scholar at Oxford. (Corr. Letter No 25, 8 June 1758, p 24; Ross. I. S. 1995. The Life of Adam Smith, p 86) Presumably this amount covered his costs, leaving without doubt a sufficient sum to hire the lecture rooms for the next season, and a profit for the sponsors (Lord Kames and Gilbert Elliot).

The output of his Edinburgh lectures 'perished' at the instant he delivered them, but their delivery in the market for education paid him revenue, available for ‘immediate consumption’ and some of it for capital accumulation. Today, we would consider this activity to be productive, and so must Smith if his definition of productive labour is regarded as more important than his example of unproductive labour. For the ‘respectable auditory’ who listened to his lectures, they invested some proportion of the price of admission in their human capital, the benefits of which lasted beyond the lectures (Smith recognised human capital as part of the enhanced skills of labour) and the rest perished in an instant.

Prodigality denied the prodigal an opportunity to conserve and add to his net capital and earn future profits, for which ‘sin’ he was ‘perfectly crazy’. The receivers of his wild spending made their profits on top of their costs of supplying him with whatever he fancied. To the extent that they saved from these revenues they were productive. And so it was true for all suppliers who supply for acts of consumption.

Consider another unproductive set, famously referred to by Smith:

“The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers. They are the servants of the publick, and are maintained by a part of the annual produce of the industry of other people. Their service, how useful, or how necessary soever, produces nothing for which an equal quantity of service can afterwards be procured. The protection, security, and defence of the commonwealth, the effect of their labour this year, will not purchase its protection, security, and defence, for the year to come.” (WN II.iii.2: pp 330-1)

Again we should differentiate between government expenditure for preparedness for war, primarily on defence readiness, which provides costs plus profits for defence suppliers and therefore productive work for their employees, and which reproduces itself in each round in the economy, and government expenditure on the maintenance of soldiers and seamen, which is final consumption that does not reproduce itself. Government spending was paid for out of taxation, which reduced the revenues of the taxpayers, both for consumption and saving. To high the taxation levels and it means productive investment is limited, even reduced.

Smith’s concern with productive and unproductive labour was about the small proportion of the total capital available each year for net growth, because it was from this proportion that additional products of land and labour (the ‘necessities, conveniences, and amusements of life’) became available to society at all levels (unequally, of course), but it was the only way in which the lower orders, the labourers and their families, would raise their incomes above subsistence and bring more labourers into work.

His problem was that he had identified that while it was net revenue that drove growth, his definitions were primitive and not easy to identify in practice, and therefore difficult objectives for policy to affect. Exhortations for spendthrifts to be prudent, for people to be frugal, and for landlords and undertakers to save and invest, would have the usual moderate influence on behaviours. The 'urge to better themselves' may be dampened if rewards to risk and enterprise for profit seekers, and intenser working hours for labourers, were too low.

Monday, July 23, 2007

Another Busy Day on The Book

Another quiet day on the blog front, mostly because I am working through my ms of The Book. I took ten minutes out to post a comment on Chris Dillow’s Stumbling and Mumbling Blog on what seemed to me to be a not very well argued case based on a version of social evolution in a hunter-gatherer society (of the mind, that is, not of a real society).

It’s amazing how many references need checked to meet the bibliographical standards of publishing. The slightest discrepancy is a repeated reference that does not quite correspond to the entry in bibliography, and a copy editor sends a ‘query’; the remedy: check and re-check and clear up anything not perfect (a dropped capital letter can result in a query; a different edition from one end of the book to an entry at the end (many months later in writing time); a changed date of publication, and worse, the reference you had a year ago that you cannot find the details today).

I am also reading for sense (and non sense!). A clean page worries me more than a page with red ink – did I miss something? Two or three pages without red ink provoke me into reading them over again.

This is slow work and takes patience and non-interruption. It excludes taking time to read notes from the daily mail and hourly email. That is why the blog is under pressure.

Sunday, July 22, 2007

Why Smith Became a Commissioner of Customs

All quiet on the Adam Smith front today for Blogging. A couple of uninteresting asides using Smith’s name were not worth commenting upon. So I haven’t.

Maybe because I have been working steadily through my manuscript and these items seem to be rather unimportant. Certainly, they didn’t require me to think through what Smith actually said and meant, instead of the nonsense spouted about him, which would hardly help us understand he legacy.

Instead, I was writing a short note to a chapter detailing the issues involved in Adam Smith choosing to apply for the vacant post as a Scottish Commissioner of Customs and the Salt Duties in 1777, a year after he had guided his first edition of Wealth Of Nations through the press. I have never been happy with the apparent silence among his biographers about this episode and decided to develop some ideas I included in my earlier book, Adam Smith’s Lost Legacy (Palgrave Macmillan 2005) about this strange decision of Smith’s.

I decided to go through the entire episode in detail from the source materials, the biographical accounts (Stewart, 1793; Rae, 1895; Scott, 1937; and Ross, 1995) and what authors of articles had written about it (not much in the latter case).

It seems clear to me that Smith’s actions were deliberate, calculated and well executed. He also called upon a very strong alliance of powerful interest (in the 18th century meaning of this word; basically people well placed to use their influence on the decision-makers, in this case, including the Prime Minister, Lord North).

Basically, the coincidence of the colonial rebellion (1776-83) with publication of Wealth Of Nations posed serious problems to Adam Smith. He was actively seeking to influence decision-makers and influential members of the British political establishment to dismantle the mercantile economy of Britain through Wealth Of Nations, which included a sharp polemic against the American colonial trade under mercantile monopoly laws, which, added to his critique of the Chartered Trading Companies, and the high cost of unproductive European Wars, and his taking sides on the American rebellion, they began to have a cost on his influence. Friends, including David Hume, warned him to desist.

Reflecting on this, he realised the dangers of being identified too publicly with those that most of parliament regarded as ‘traitors’, no matter how right he believed his stance to be, was likely to undo the work he had put into his inquiry into the British economy. Hence, he chose to make himself ‘too busy’ by applying for the Commissioner’s post and absenting himself from new scholarly work.

Thus, despite promises, first published in Moral Sentiments in 1759, and repeated as late as 1759, he did not progress his manuscript on Jurisprudence for 31 years, and in a final act, he ordered all papers to be burned just before he died in Edinburgh in 1790. That’s the gist of my work today, writing up my final version of this episode for my new book.

A small issue, I know, but in the details we learn a lot more about Smith than some of the bland, anecdotal, and lazy acceptance of conventional accounts of his life. At least that’s my considered opinion.

Saturday, July 21, 2007

Remembering Adam Smith

Art Diamond writes a Blog: Artdiamongblog.com, and he reports on his pilgrimage to Kirkcaldy:

“Many years ago, we took the train from Edinburgh to spend a few hours in Kirkcaldy, the birthplace of Adam Smith. I was surprised at how little there was to honor Smith in the town where he was born and raised. There was a small cafe/theatre named after Smith. A small crystal shop sold some shot glasses with Smith's image engraved on them. And there was a small plaque, above a no-parking sign, on the main street, at the spot where Smith's family home had been.

I remember asking a very polite young father with two or three small children in tow, why there was so little of Smith in Kirckaldy [Kirkcaldy]? With a twinge of something like regret, he said that everyone in that part of Scotland supported Labor, and they saw Smith as supporting capitalism, and so did not like him much.”

CommentThere’s a lot more going on now, with more to follow. The local college in Kirkcaldy and Glenrothes (an adjacent new town) has been amalgamated and re-named ‘Adam Smith College’. Under its far-sighted and energetic Principal, Adam Smith College is seldom out of the news for long.

In near-by Edinburgh, a project led by the Adam Smith Institute, to erect a 20 foot statue of Adam Smith, in a prime position opposite the building where he worked a Commissioner of Customs from 1778 to 1790, facing down the High Street to where he lived at Panmure House and further down to where he is buried, is slowly coming to fruition.

This will be completed for an opening ceremony in mid-May 2008, attended by the British Head of State. It is also likely that there will be an international conference on Adam Smith at the time of the event, Lost Legacy will keep you posted on any and all developments, and you can keep up to date by visiting the Adam Smith Institute web site.

In this respect I should mention that the Adam Smith statue project, as you would expect, has been made possible by private donations only and without any tax payers’ money. With the recent slide in the US $, there is a need (and a request!) for more donations from anywhere in the world to cover contingencies. If anybody can help please with small or large donations, email: eamonn@adamsmith.orgThe next project should be to restore Adam Smith’s grave site the nearby Church yard or the fabric of Panmure House where he lived with his Mother, Margaret Smith (nee Douglas) and his cousin, Janet.

I think the anti-Smith feeling in Kirkcaldy, when Art Diamond visited the town years ago has diminished considerably. When the College was given its new name, there was a the usual noise from a small group of leftwing students, but it sputtered out to nothing as the majority rallied round Adam Smith’s name. With Gordon Brown, the local Kirkcaldy MP, and now Prime Minister, and a known advocate of his version of Adam Smith, it is can now be accurately stated that it is no longer the case that ‘everyone in that part of Scotland supported Labor’ and ‘so did not like him much’.

Smith Did Not Advance a Labour Theory of Exchangeable Value for Commercial Society

Liberty For All Blog (19 July ) carries an article, ‘Value is Subjective’, by Denis D. Hayes, who is described as: ‘a healthy, independent thinker, author, and medical professional. Never one to pass up the opportunity to play at being a wordsmith, especially when it comes to politics and music, he has been actively writing for more than two decades. He has been with Liberty for All since its inaugural issue and devotes the bulk of his time to his family, his work, and the pursuit of happiness’.

This, I suppose, makes Denis interesting; however, he writes with evidence that he has the haziness notion of when Adam Smith lived (1723) and when Karl Marx lived (1818 – 1883):

“It is at this juncture that I feel we should briefly examine the error that gave rise to such things as unions in the first place. It happened around 1776, and is traceable to the great work of Adam Smith, “Wealth of Nations.” At about the same time a guy named Karl Marx is looking this work over, looking for anything he can exploit in his bid to discredit capitalism. Marx found it in Smith’s so called Labor Theory of Value.

Now it is well known that Smith was very sympathetic to the working class, but unfortunately it was probably this soft spot that contributed to his major mistake. Essentially Smith said, “All things owe their value to the labor that goes into their production.” This has been shown to be false innumerable times by many people and examples, but in the most enlightening way by A. J. Galambos, who was a physicist and author, and was the developer of the Theory of Volition. Galambos correctly points out that Karl Marx lifted the statement from Smith and then reworked it to support his own exploitation of the masses concept. Marx’s version states, “All the value is created by the laborer.”

CommentDenis writes this in the midst of a fairly strong critique of the role and existence of trade unions, of which I shall say nothing. Should you be interested, follow the link above to the ‘Liberty for All’ web site.

The error of dates is only part of the problem, in that 1776 is a long way before 1818, when Marx was born and the 1850s, when Marx was writing on his labour theory of value, and was not remotely ‘about the same time’.

Denis is not clear on what Smith wrote about labour being the source of exchangeable value. He referred here to labour in the ‘rude’ society of hunters when labour was the sole factor production. There were no landlords charging rent for using their land and no undertakers paying wages to workers, or tax inspectors taking a share of their income. Smith argue that two hunters would exchange items (beavers for deer) in the ratio by which it would cost each labourer in labour time to hunt the other animal they wanted to exchange for what they had caught earlier. If it took twice as long to catch a beaver than it did to catch a deer, he suggested that the beaver would exchange for two deer.

As society advanced from sole hunters to shepherds, then farmers, and finally commerce, the number of factors required for production would increase from one to many, and each owner of the constituent factors would require a share in the revenue received from selling the joint product. From this time on, labour was no longer the sole source of production and the labour time theory of exchange value would no longer be relevant. This much is clear from reading Wealth Of Nations closely, as I explain in my forthcoming book on Adam Smith for Palgrave’s Great Thinkers in Economics series (2008).

Marx drew on the exchange value of labour time in ‘rude’ society, denied the existence of property, without which society would have remain at the hunting mode of subsistence age, not developed knowledge of shepherding, farming or commerce, and not experienced a growth in population at all. However, that may be disputed by Marxists but they cannot challenge the historical fact that hunting survived, which survived to the 18th century, had small populations in vast territories, nor can they challenge that hunting societies surviving to day (Kalahari, Papua New Guinea, Amazon, Australia, etc.,) are all low population, low technology and now, smaller land territories. At one time, not long ago, the whole world was limited to hunting as its mode of subsistence (as John Locke put it: ‘all the world was America’, alluding to the hunting tribes of North America, then being reported in detail by travellers and explorers).

Marx was wrong about ‘surplus value’ and he created a whole new vocabulary of abstractions trying to make it credible. Smith’s expressed a truism that factors had to be paid their costs, plus in the undertakers had to receive a profit, to induce them to continue supply their services. This did not mean that buyers had to pay sellers their costs. Market prices were determined by supply and effectual demand. Where a gap existed – as Smith thought there would be – markets would need to adjust the amount they supply or the amount that is demanded.

Friday, July 20, 2007

Light Blogging today, Friday.

I’m off to London at short notice in connection with a book I published 18-years ago on another, this time a biography of a minor, but overly famous, 18th-century figure, Lieutenant William Bligh (‘Captain Bligh, the man and his mutinies’, 1989. Duckworth, London).

This was a spill-over from my then academic interest in defence economics, upon which I regularly taught economics to serving officers in HM Forces, with occasional forays to Washington, DC.

Every now and again, tv and film companies make programmes on Bligh and the Bounty mutiny, and their researchers find my scholarly treatment and conduct telephone interviews, sometimes asking me to do a longer interview (mostly I decline). I believe one such programme is still put out on the History Channel. This time it’s a British tv channel and I agreed to do a short interview in London because they appear to be serious producers, not trying for the usual tabloid treatments. (The films about the Bounty mutiny are so devoid of historical accuracy as to be laughable, but great entertainment and best treated as such.)

I do not expect to return to Edinburgh until around 9.30 pm. It also conveniently nearly coincides with me completing the manuscript of ‘Adam Smith’ (to eb published mid-2008) yesterday evening. I am re-reading the hard copy before making final corrections and writing a short ‘afterword’ (and checking references). Taking the train, I have a few hours each way for careful reading.

Thursday, July 19, 2007

Adam Smith On the Analogy of the Circulation of Blood with Trade Flows

A Commentary on Flow: Muscles, Trains, and the Internet Converge (19 Jul) Benjamin Cohen, an Asst. Professor of Science, Tech., and Society at the University of Virginia, writes today:

“One could delve considerably more deeply into any of these, but my own recent reading has me thrumming on the circulatory analogy. Specifically, Richard Sennett's 1994 monograph Flesh and Stone: The Body and the City in Western Civilization, and in particular its chapter on William Harvey's revolution. Though Sennett is by no means the first to draw a conceptual line from William Harvey's 1628 De motus cordis (with its bracing new delineation of the role of a pumping heart in powering the circulation of blood throughout the body) through, for example, Adam Smith's Wealth of Nations (1776), with its own revolutionary conception of the circulation of wealth, resources, workers, etc., in the modern economy, his comments seem especially pertinent in the current context.

Thus, for example: The new understandings of the body coincided with the birth of modern capitalism, and helped bring into being the great social transformation we call individualism. The modern individual is, above all else, a mobile human being. Adam Smith's Wealth of Nations first reckoned what Harvey's discoveries would lead to in this regard, for Adam Smith imagined the free market of labor and goods operating much like freely circulating blood within the body and with similar life-giving consequences. Smith, in observing the frantic business behavior of his contemporaries, recognized a design. Circulation of goods and money proved more profitable than fixed and stable possession. Ownership served as the prelude for exchange, at least for those who improved their lot in life. Yet for people to benefit from the virtues of a circulating economy, Smith knew, they would be obliged to cut themselves free of old allegiances. This mobile economic actor would moreover have to learn specialized, individual tasks, in order to have something distinctive to offer. Cut loose, specialized Homo econimus could move around in society, exploit possessions and skills as the market offered, but all at a price.”

CommentAdam Smith knew Quesnay, leader of the French Physiocrats and medical doctor, well from his meetings with him in France. He knew of Quesnay’s Tableau Economique and could recognize its affinity with the circulation of blood.

In Wealth Of Nations he used a particular gruesome image of blocked blood circulation to emphasise the risks to the British economy, as a result of the implementation of mercantile political economy policies, in respect of the British colonies in North America, and real problem of the ‘recent disturbances’ that were to lead to the successful rebellion of the colonists.

Mercantile colonial trade led to distortions in the allocation of capital across manufacturing industries because the monopolising spirit of the Navigation Acts, which reduced competition and thereby raised prices of colonial imports into Britain, leading to higher profits, drew off capital that would normally have gone in domestic activity, and into trade with the rest of Europe. If that trade was ‘blocked’ for any reason, the disruption it could cause would be serious, though not insurmountable.

It would be better if Britain did not have colonies (they costs too much to defend) and instead of imposing an exclusive monopoly, it traded freely with neighbours. Any way, Benjamin Cohen, might like to note this extract from Wealth Of Nations if he is looking for references in this area:

‘In her present condition, Great Britain resembles one those unwholesome bodies in which some of the vital parts are overgrown, and which upon that account, are liable to many dangerous disorders scarce incident to those in which all the parts are more properly proportioned. A small stop in that great blood-vessel, which has been artificially swelled beyond its natural dimensions, and through which an unnatural proportion of the industry and commerce of the country has been forced to circulate, is very likely to bring on the most dangerous disorder upon the whole body politick. The expectation of a rupture with the colonies, accordingly has struck the people of Great Britain with more terror that they ever felt for a Spanish armada, or a French invasion.’

‘The blood, of which the circulation is stopt in some of the smaller vessels, easily disgorges itself into the greater, without occasioning any dangerous disorder; but, when it is stopt in any of the greater vessels, convulsions, apoplexy, or death, are the immediate and unavoidable consequences.’ (WN IV.vii.c.43. pp 604-5)

Thursday’s Naïve Nonsense About Adam Smith

“The dealmakers forgot to consult their undoubtedly dog-eared copies of Adam Smith, the man they cite for the proposition that they are being led as if by an invisible hand to do the public good. ... It is not unreasonable to guess that Smith would not have approved of a taxation system that allowed a British billionaire to pay taxes at a lower rate than the woman who cleans his office, or an American multibillionaire to enjoy a tax rate far below that inflicted on his butler".

Irwin M. Seltzer, The Weekly Standard”

CommentReally? Chicago dealmakers have read Adam Smith’s Wealth Of Nations? Their copies are so often used that they are ‘undoubtedly dog eared’? He means ‘beyond reasonable doubt’? And they found the phrase, which they have forgotten: ‘they are being led as if by an invisible hand to do the public good?

Wow! Well we know for sure that Irwin Seltzer does not read Wealth Of Nations regularly enough for his copy to be dog eared, because if he had read it, even once, he would know that Adam Smith did not say ‘led as if by an invisible hand’. There’s no ‘as if’ about it.

Wednesday, July 18, 2007

Adam Smith on 'Stagnation'

‘The tendency for the rate of profit to fall comes straight from Ricardo - it's just the law of diminishing returns. Ricardo - and indeed Smith before him - thought this would lead to a "stationary state" in which economic growth ceased.’

CommentJust to set the record straight on Smith’s ‘stationary state’, he reported where the dynamics of his theory of growth would lead, unless something else intervened. Smith foresaw ‘increasing returns to labour in the division of labour’, not Ricardo’s ‘diminishing returns’ which led to a dead end. Smith’s argument for endogenous growth was different from Ricardo's and much neoclassical thinking. That neoclassical economists are changing track on this is encouraging.

The value of his ‘prediction’ was related to the situation when a country had ‘acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other societies allowed it to acquire; which could, therefore advance not further and which was not going backwards, both the wages of labour and the profits of stock would probably be very low.’ (WN I.ix.14: p 111) This was the ‘logic’ of his model, not a time-bound prediction.

He adds in the next paragraph: ‘But perhaps no country has ever yet arrived at this degree of opulence’ (WN I.ix.14: p 11). And this, plus experience since Smith’s day, shows why Smith did not predict so much as derive the conclusions of his growth model. The technological impact of the 19th-20-21st centuries show that in practice in the real world, there is no danger of a country ‘acquiring that full complement of riches which the nature of its soil and climate, and its situation with respect to other societies allowed it to acquire.’

Smith also noted that a country could deliberately reach such a state of no growth, as China had done to become stationary: ‘China seems to have been long stationary, and had possibly long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions’, which was ‘inferior to what, with other laws and institution, the nature of its soil and climate, and situation might admit of.’ (WN I.ix.15: p 111-2)

Note that the key restrains in Smith’s model were ‘its soil and climate, and its situation’, reflecting the predominantly agricultural base of 18th century economies, and also the choices that it makes, ‘consistent with the nature of its laws and institutions.’

If it chooses to ‘opt out’, as China did deliberately by whim of the then Emperor in the 15th century (just as the commercial revival began in Western Europe) what happened is history. Chinese advanced technology withered; Western technology and science slowly and gradually flourished; China became backward; Western Europe advanced beyond the constraints of ‘soil, climate, and its laws and institutions’. China is now catching up, having stagnated under the Marxists, until they switched from Marxism towards capitalism.

Chris cites this idea from an otherwise interesting paper ‘Classical Growth Theory: from Smith to Marx’ by Gonçalo L. Fonseca

I can see also the influence of Robert Heilbroner’s popular exposition, The Worldly Philosophers: the lives, times and ideas of the great economic thinkers, Simon & Shuster, and his essay on the subject, ‘The Paradox of Progress: decline and decay in The Wealth of Nations’, in Andrew Skinner’s and Tom Wilson’s, eds, Essays On Adam Smith, 1975, Oxford University Press, both of which I criticise in Adam Smith’s Lost Legacy, 2005, Palgrave Macmillan.

The Thoughts of Marcus Ting-A-Kee

“In a few of my blog posts I've written about how important it is to adjust your presentation and communication to your audience. In effect, you were telling them, What's In It For Them. It's all about creating a relevant experience to sell an idea, product or concept.

Now let's step back and examine this WIIFM concept applied to another situation. Have you ever worked on a project where you have an idea on how more success can be achieved if the project team were to work more collaboratively with other project teams and personnel? In my experience the typical project manager response is, "It's not my problem," or, "It's outside of my scope," or, "It's someone else's problem." Then you step back and watch the car crash in slow motion; the problem manifests itself and severely impact the project and company as a whole.

I liken this to Adam Smith's (the Father of Economics) "invisible hand."

"As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By [p]referring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it." (Adam Smith, The Wealth Of Nations)

Basically, this means each individual acting in his (or her) own self-interest will lead to a better outcome for the society as a whole; or WIIFM but on a project-scale. The problem with this is simple. No one ever builds roads and the infrastructure to connect things because it's in no specific person's best self-interest; but that's not my problem. Is it?

I'm not saying expand a project's scope, merely understand how a project fits in with the big picture.

CommentIngenious, especially as he follows the text with a lovely photo of heavy road roller flattening a recently hot-tar laid road surface. From there he implies that the project manager who sees the big picture can enlist co-operative action from those suppliers needed to deliver it by inducing in them ‘what’s in it for me’ (WIIFM) thoughts.

However, what does this have to do with the truncated quotation from Wealth Of Nations? (WN IV.ii.9: p 456) Very little, except it allows the author to invoke the ever-popular ‘invisible hand’, of which I am often called upon to write about here.

For the record, you may care to note that the WIIFM question would provoke answers, and presumably bilateral discussions, about the prices that the project manager might offer to the WIIFM audience for their co-operation. Nothing ‘invisible’ about that is there? We call it negotiation in price determination, otherwise known as markets. As argued many times, Smith’s sole reference to the invisible hand in Wealth Of Nations was not about markets.

But, let’s be fair. Mr Marcus Ting-A-Kee has presented an original way of getting the attention of his suppliers, without too much of an atrocity against Smith’s use of the famous metaphor.

Fancy a Rare Copy of Wealth Of Nations?

For those interested in obtaining a good copy of Adam Smith’sWealth Of Nations, I received notice from a bookseller I deal with of an 1812 edition by Cadell & Davis, publishers.

The bookseller’s notes accompanying news of the 3-volume edition state:

‘Smith's book was like a one-man Royal commission, a tour de force, drawing on evidence over the millennia since the fall of Rome and from contemporary evidence he analysed in painstaking detail (The Scotsman)’.

Regular readers of Lost Legacy will recognize these words as a summary of mine. Obviously somebody in The Scotsman (Edinburgh) reads Lost Legacy or articles of mine, showing an excellent taste in reading.

I have no commercial interest in the volumes on sale by Stella & Rose nor any connection, except as an occasional customer (I have found them efficient, helpful and honest; that’s all I know of them).

I am posting this notice as a service to Lost Legacy readers. Let me know how you get on.

“AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONSSmith, Adam. No illustrator listed. Stock no. 581353Cadell & Davies. 1812. Almost very good condition with no wrapper. Three volumes. Three-quarter brown leather with marbled boards. A New Edition to Which is Prefixed an Account of the Life of the Author and a View of his Doctrine Compared with That of the French Economists. Listed as one of the 100 books that shaped world history, along with for example the Gutenberg Bible. Smith's book was like a one-man Royal commission, a tour de force, drawing on evidence over the millennia since the fall of Rome and from contemporary evidence he analysed in painstaking detail (The Scotsman). Vol I: xli + 499 pages; Vol II: viii + 523 pages; Vol III: vii + 515 pages. Spines rubbed, corners worn. 3" split to top of spine of Vol I together with a small tape repair. Foxing to prelims and a very few scattered foxspots throughout. Bookplate oF G.C. Greenwell to front pastedowns. It's possible that this is the famous geologist noted for his interests and books on mining for example Notes On The Coalfields of East Somerset. Price £520.00”

Tuesday, July 17, 2007

A Strange Claim About Adam Smith

Apropos of nothing, but I came across a Blog today calling itself: “Adam Smith Was A Socialist”. Its author says of himself (here):

‘Rants & musings of an innuendo-loving, cider-quaffing, number-crunching, faux intellectual, internationalist Scottish nationalist’ and expands on this in his profile:

‘The title refers to my absolute distaste for the libertarian right and its appropriation of one of the finest political thinkers Scotland (or the world) has ever produced. Personally, on a left-right scale I'm happily on the centre-left, thank you very much.’

It has on its side bar: ‘People of the same trade seldom meet together, ... but the conversation ends in a conspiracy against the public.’

Obviously the author of the Blog does not realise this was a criticism of the remnants of the city guilds that were staffed by skilled labourers, not capitalists (they didn’t exist in Smith’s day), who were given to imposing restrictive practices to prevent anybody who had not served an apprenticeship in the town they wanted to ply their trade in to undertaken any work there.

The quotation (find it at Wealth Of Nations, I.x.c.27: p 145) is often used to attack modern capitalists, forgetting or more likely not knowing, that Smith refers to ‘trades’ as in skilled workers, who ran a monopoly to keep out competition and thereby keep up prices. Today this role is often undertaken by trade unions.

A well-known example of being refused permission to ply his trade as an instrument maker, who had served his apprenticeship in London, was the Greenock (a town a few miles west of Glasgow on the River Clyde) born, James Watt, of steam power fame.

Adam Smith and his fellow professors arranged for him to be appointed the University’s instrument maker, allocated him some rooms for his workshop and employed him usefully around the University fixing machines and such like. The University was then sited just outside the Glasgow town boundaries and therefore the writ of the Glasgow ‘trades’ did not cover the University’s grounds. Smith did not like restrictive practices or monopolists whatever rank they came from in society.

By accident, the University’s model Newcomen steam engine was broken and James Watt was asked to fix it. He did and out of interest, he continued to experiment until he had improved it, discovering in the process an innovation that was to lead to the discovery of directed steam power, a major element in what became the industrial revolution. If the Glasgow skilled tradesmen had had their way, Watt would not have ‘fixed’ the model engine, would not have improved it and the industrial revolution might have been delayed.

What does this teach us about ‘socialism’, or about Adam Smith being remotely interested in it?

Ignorance Leads Leaders into Error

“Part of the reason that capitalism is so powerful as a control mechanism is because of its ability to use corporations. I wanted to see what, for example, Adam Smith in the Wealth Of Nations might have to say about capitalism. I ran a search on the text version and found 12 references. To my surprise every one of them was critical of the corporate idea. Here are some examples’...

There follows the usual misattributed references of ‘capitalism’ to the 16th to 18th century Chartered Trading Companies set up by either Royal Charter from the King or by Act of Parliament, which awarded exclusive legal territorial monopolies. They had nothing to do with 19th to 21st century corporations.

Moreover, Adam Smith died in 1790 and the word ‘capitalism’ was first used in 1854 William Makepeace Thackeray (1811-1863: today’s his birthday, incidentally!) in his novel The Newcomes. Second incidentally: his father was an official in the East India Company, the villain of the peace, which Smith bitterly criticizes, with good reason in Wealth Of Nations.

Douglass Carmichael then works up to his final, surpirsing and amazing conclusion in his penultimate sentence:

“It is amazing to me that while it’s obvious why those people dependent upon this economy don’t look for this kind of criticism from Smith as their ideological father, those who are critical have not made more of what Smith actually says. The point for us it is that the corporations actually undermine markets. Corporations were created by the state through a chartering system that gave privilege in exchange for responsibility for a limited time period of, say 20 years. The undermining of this social contract, the abandoning of the corporate charter reciprocity, will turn out to be seen, I think, as one of the great mistakes of the 19th and 20th centuries. It is like a cancer in the DNA of the Constitution. In my ne[x]t post I’ll turn to John Locke and the strange origins of the idea of private property.

CommentThis has to be the most ridiculous statement I have seen in respect of this subject:

“The undermining of this social contract, the abandoning of the corporate charter reciprocity, will turn out to be seen, I think, as one of the great mistakes of the 19th and 20th centuries.”

As Mr McEnroe would put it: 'you can't be serious!'

Douglass Carmichael turns history on its head. Having quoted Adam Smith he has not done him the courtesy of reading the chapter from which he has quoted. Did he not have Smith’s Wealth Of Nations to hand? Was he merely cribbing from a book of quotations?

It was allowing these corporations to continue under Royal protection that was the cause of the misery they created, not the ending of them.

The source of Douglass Carmichael's error lies in the immediately preceding sentence:

“Corporations were created by the state through a chartering system that gave privilege in exchange for responsibility for a limited time period of, say 20 years.”

Does Douglass Carmichael not realise, which Adam Smith points out, that it was the state-backed (and enforced) exclusive monopoly status that was the cause of the evils committed by the East India Company and the sorry distress and cruelty suffered by the Indian population? Smith favoured competition, not monopolies, whether private or state-backed.

The Chartered Companies operated at long distances from the UK – it could take about a year or so for messages from London to reach the local Company officials and for their replies to be returned - and effective supervision was impossible from 10,000 miles distance. The exclusive monopoly powers, no competition, even from individual traders, large fortunes swishing about to bribe ‘inspectors’ and ensure safety from too close a parliamentary scrutiny, and a management structure unsuited to probity and good behaviour that were the causes of the problem.

The only Chartered Trading Company that Smith felt was (relatively) ‘clean’ was the Hudson Bay Company, but this was due to the frozen environment it operated in and the very narrow weather window in which the Company ship could reach the company depots in North Canada, thus deterring interlopers and keeping the Company's haul in produce down to what a ship could bring home annually.

It is usual in articles dropping in on this 18th-century debate to associate the joint-stock company structure of the Chartered Companies to modern shareholder, joint-stock, corporations. These were created in the 1870s in Britain (and copied elsewhere) in which their legal structures were policed, such that today they are fully subject to the laws of contract, to legal responsibility and to the full weight of legal redress should their officers misbehave. Recent court cases should be a comfort to all of us.

Smith approved of joint-stock companies where the capital requirements were too high for an individual or small group of individuals, where no monopoly privileges were granted, where the work process was routine (i.e., definable, not universal) and where the fate of the company was closely dependent on the probity of its officers. That is why he approved of joint-stock corporations such as the Bank of England, the Bank of Scotland, the Royal Bank of Scotland, the insurance companies and such like.

Monday, July 16, 2007

19th century US Farmers Vote for Smithian Policies

Bruce Miller writes a Blog called: ‘The Blue Voice’ and has contributed a fairly long, thoughtful retrospective review article on William Appleman Williams' book (1969), The Roots of the Modern American Empire: A Study of the Growth and Shaping of Social Consciousness in a Marketplace Society, Vintage Books, or ‘Roots’ (here)

I have extracted below references to Adam Smith:

‘Farmers, the railroads and Adam Smith’

”Williams makes another important point in connection with the "Smithian" outlook of the farm businessmen. Their famous battles for better regulation and the railroads, and even for publicly-owned railroads, was based on a particular understanding of how a capitalist economy should work:

[Adam] Smith likewise provided a solid critique of monopolies, and of the misuse of the government by special coteries of metropolitan interests. The farm businessmen were also aware that Smith offered careful and even sophisticated justification for government actions, such as those concerned with improving transportation or checking monopolies, that were designed to strengthen the structure and guarantee the freedom of the marketplace itself. And their own experience, particularly after the 1840s, steadily reinforced their understanding and acceptance of Smith's great stress on the necessity of the sustained expansion of the market as the dynamic engine of continued progress and freedom. (Miller’s emphasis)”

“This concern for regulating railroads' rates and practices was also heavily related to farmers' concern for access to the export market. "The farmer's concern with transportation costs, which arose directly out of his routine involvement with the foreign market, was the primary cause of his increasingly vigorous attack on the railroads" (my emphasis). So, the railroad fight themselves played an important role in shaping the agricultural majority's concern for public policies on the export markets.”

“…But Williams also explains that the "agricultural businessmen" were operating with an understanding of the world based on Adam Smith's classical economic theories. Smith stressed the importance of foreign trade. And he emphasized the need for free trade without the kind of restrictions that the British mercantilist system of his time imposed. Smith's American admirers also held the conviction that the spread of free trade would convince those who benefitted from it of the virtues of a capitalist free market economy. And that along with spread of capitalism would come democratic and liberal institutions. Their notion was "a fair field with no favor" in the global marketplace, as Williams puts it. And they believed democracy would follow.”

CommentUnusually, this retrospective review published on the Blog on 15 July 2007 of a book published in 1969, was so interesting and well written, I did not jump to the references to Adam Smith first.

The subject was interesting and covered ground I knew nothing of. I have been busy on my Adam Smith books all day, having lost writing ground this week-end with the birth of a grandchild (a most wonderful diversion from the usual daily grind and one I much enjoyed).

I expect the issues in the book by Williams were controversial and I can see the connection the farmer’s lobby made with Adam Smith. He envisaged that the British American colonies, because of their empty territory to their west and the abundance of land per head of the population of immigrants, would continue to enrich them as productivity based on agriculture would continue to rise. The colonies are a high-wage economy because labour was scarce and new labourers arriving from Europe would work for high wages at first and then take the plunge and become farmers in their own right, thus denuding the labour force again and adding to the bidding up of wages.

Smith believed that in a hundred years (circa 1880) the former colonies would be the richest country on earth. As he knew nothing of the impending industrialisation that was a few decades ahead, Smith based his prediction entirely on the growth of agriculture with a smaller manufacturing base serving the community. By the 1880s the USA was already a thriving industrialised economy, with a rich agricultural sector. It was the policy tension between these two powerful sectors that drove US politics from the dispersed constituencies in the cities and the rural hinterlands.

That the agricultural lobby took up Smith’s references in Book V of Wealth Of Nations on the government’s role in promoting ‘public works and institutions facilitating the commerce of society’ is not surprising. Given Smith’s prestige it must have been a powerful narrative for aspiring politicians from the sector. That public ownership for rail roads was considered must have driven some electors to the ‘left’ (is this where the ‘Farmers and Labour’ ticket came from?) and others who hostile to city business would have been re-assured if Smith was supposed to be in favour too.

I like the notion that America was ‘full up’ and must expand elsewhere, though I am unimpressed that this involved capturing some small island groups (Philippines, Samoa, Cuba), hardly places that could relieve either US population pressure(?) or prove a vent for US agricultural exports.

There is so much more in the article that it must be of interest to US readers and I heartily recommend it to all.

Sunday, July 15, 2007

Overcoming the Malign Effects of Self-Interest

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Gurcharan Das writes in The Times of India (15 July) about ‘Capitalist morals’ and his experiences on joining the board of a private company and discovering that the new MD had been compelled to pay a bribe to get a government department to pay an outstanding invoice (here):

“Seventy percent of the company's sales came from this government customer, who had always received 2% of the invoice under the table for expediting payments. The bribe was shared by many state employees. Our new MD, who had joined a year ago, refused to pay the bribe.

Are people honest only because of the fear of punishment? Without checks would people behave like Duryodhana in the Mahabharata? Modern social scientists assume that people are only motivated by 'self-interest'. But is that true? If a child is in danger, don't we have a natural desire to rush and save it? Adam Smith called this sentiment 'sympathy' in his Theory of Moral Sentiments. Rousseau called it 'pity' in his classic, Discourse on the Origin of Inequality.

We are not purely selfish, but our public institutions have to hold individuals accountable. In our case, accountability is eroded because our idealistic labour laws relied on the worker's 'good' nature and his superior's 'bad' nature. Hence, there isn't quick punishment for corruption in the government (while you are sacked in the hour in private companies.)

Institutions have to depend both on the 'good' and 'bad' in human beings. If one is cautious and re-designs government only on selfish motives, you might erode whatever public spirit that exists. But ours was the opposite mistake — we relied on too much public spirit. To restore accountability now you don't need new solutions. Just adopt the accountability systems of high performing governments like Canada and Australia. Even better, follow the recommendations of our own administrative reforms commissions.”

Comment
Corruption is reputed to be endemic in Indian government. That was the impression I got when I studied defence economics in the 70s and 80s. It was certainly not surprising when the massive regulatory regimes of government and large state sector activity were considered, plus tariffs on imports and on exports (I kid you not; ‘if it moves tax it; if its hidden confiscate it’).

Gurcharan Das makes an interesting observation on India’s perspective: too naïve an official attitude that people are good basically and are only bad if treated as if they are, is a theme running through much of the social work community (until, that is they have been about six months in the job).

Pufendorf, a philosopher who influenced Adam Smith’s thinking) commented in 1722 on this sort of idealistic belief by observing ‘it being much more easie to fansie perfect Men than to find them’ (Pufendorf, Law of Nature and Nations, 7.1.6).

In the old Soviet Union, corruption was also widespread. It goes with state controls because with controls those who administer and police them have discretion on what’s allowed and what’s not, and who’s allowed to do something and who’s not, i.e., a potential market in corruption.

I knew a trader operating in the old Soviet bloc, who bought million-gallon quantities of a chemical substance for his western company. He split a fine commission on the per gallon price with the Soviet official who paid it into two Swiss accounts. How do you monitor such activities? Appoint inspectors to find them? That makes for a three-way split into three bank accounts... and so on ad finitum.

“Modern social scientists assume that people are only motivated by 'self-interest'.”

Self interest is much maligned and much misinterpreted. Smith included in a persons’ self interest, a concern for family and so on, through to strangers in diminishing intensity.

He also noted that the European who was supposedly indifferent to 100 million Chinese people losing everything in an earthquake, would (it’s in the next often unread sentences) recoil because ‘when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration’… ‘It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.’ (TMS III.3.4: p 137)

If a society can engender such a ‘superiority of character’ to come to the fore – corruption corrupts those who stand-by and let it pass – then it does not need the fear of punishment to do what is right, but meanwhile that is all we have. Those whose standards drop and who are caught and who go to jail are not indicators of the end of game of a society; they are indicators that its end game is postponed once again.

That Gurcharan Das is discussing the ‘incident’ openly in The Times of India is a huge step forward. Congratulations.

Silly Sunday Stories on Adam Smith, no. 2

“The notion that Adam Smith's invisible hand reaches into the spiritual realm has many detractors. Steve Bruce, a professor of sociology at Aberdeen University in Scotland, says market theory "works for cars and soap powder but it does not work for religion." ... The Church of Sweden is also skeptical of the supply-side view. "We don't sell a product," says archbishop Anders Wejryd.”

CommentDoes not the old army credo go: ‘If it moves, salute it; if doesn’t move, paint it’? Well it seems among economists today if you’ve got writer's block, bung down “Smith’s invisible hand” and work-up a story from there.

‘Reaches into the spiritual realm’? Andrew Higgins takes an isolated metaphor used only three times by Adam Smith and many times before him by many other wordsmiths (no pun intended) a dimension too far.

The rest of the article is sullied with a stupid misuse of a metaphor used by Smith for something else entirely. This is not Mark Thoma's reponsibility.

Religions have always had an economic dimension. But the only thing invisible in them is the gods they believe in. That includes the Roman god, Jupiter, whose invisible hand protected the Emperor from his enemies with thunder bolts.

“The original edition runs to more than 900 pages, and even abridged versions are more than 300 pages, so it is rarely read – except, perhaps, by those who are required to do so for economics courses.

And even if you were prepared to plough through it, O’Rourke argues that Wealth cannot be property understood without first reading Smith’s Theory of Moral Sentiments, his philosophical tome published in 1759 – which is even longer.”

CommentIs this sloppy fact-checking by Paula Hawkins or by P J O’Rourke? It is not clear from the context.

If was Paula, then both her and her sub-editors at the Times (London) are in breach of the second rule of journalism check all claimed factual statements. The first rule is: Keep your imagination to your expenses claims, not for your copy'. In this case she could have ‘Googled’ or ‘Yahooded’ (no bias here) both books in the comparison, or checked the books. Thought so; she hasn’t read either book.

If it was ‘P.J’, well what can I say? The master satirist should check with his expensive fact-checking agency and claim a re-fund, or perhaps, being in the USA, he should initiate a legal claim for, say, several million dollars for the trauma such sloppiness will cause him, loss of prestige and the cost of pulping and re-printing his book.

Fact: Wealth Of Nations at approximately ‘900 pages’ is an acceptable statement (see below for technical details).

So, what can we make of Paula’s sentence (perhaps misled by P. J. O’Rourke) that ‘Smith’s Theory of Moral Sentiments, his philosophical tome published in 1759 – which is even longer’?

Somebody has not checked their facts.

You could protest that I am being pedantic. I would not agree. Paula’s error is not just of fact: she makes the comparison by way of stating that Wealth Of Nations is such a long book that readers of the Times On-line are unlikely to read it, especially as she insists, they would have to read the even longer' Moral Sentiments first.

But a simple check shows that it isn’t.

It is not the length alone that puts readers off. I doubt that any students are ‘required to read’ Wealth Of Nations in economics courses today (the best will, of course, en route for tenure track). The discipline has moved on and away from reading 18th-century authors, even one’s as famous as Adam Smith.

Potential readers have not been introduced to what Smith was about when he wrote hisr eport of his inquiry into the nature and cayses of the wealth of nations'. Without this understanding, Smith’s detailed argument, backed by his evidence, soon loses them, hence, the market opportunity for P. J. O’Rourke to write a popular version in his inimitable style. I reviewed it on Lost Legacy and it has my qualified recommendation – if it gets readers to turn to the original text, so much the better.

I have eleven editions of Wealth Of Nations (more, if I add my editions in my library in France) and I have only one which is under 500 pages, and that after widespread vandal-like cutting by its editor. Paula says there are editions with over 300 pages, which is either in 5-point type or is after a large-scale brutal abridgement.

Moral Sentiments, the Glasgow edition (Oxford University Press/Liberty Fund), inclusive of a technical appendix and the index, is 412 pages. Even adding in the 52-page editors’ introduction, its pagination only rises to 464 pages, which is well short of the claim that it is ‘even longer’ than Wealth Of Nations.

Friday, July 13, 2007

Bargains in Adam Smith's Wealth Of Nations

From The Herald, Glasgow (Not Paisley!) a snippet of interest to those nursing their first editions of Adam Smith’s Wealth Of Nations:

“Adam Smith book fetches £66,000

“A RARE first-edition copy of The Wealth of Nations by Scottish economist Adam Smith was sold for £66,000 at Sotheby’s in London yesterday. The book, in two volumes, had been expected to sell for between £40,000 and £60,000.”

CommentWhen first published on 9 March, 1776, in two volumes, it sold for the princely sum of £1.16s.0p and it kept the same price for the second edition published on 28 February 1778.

A ‘Supplement’ edition was published on 20 November 1784 with an extra 24,000 words, selling at 16 shillings to purchasers of the first edition. This Supplement was published along with the 3rd edition (20 November 1784), incorporating the material in the Supplement. This is regarded as the definitive edition in that it incorporated Smith’s detailed corrections to errors that had crept into his text.

The fourth edition was published in 1786, but was not altered in other than trivial typos and therefore is really a reprint of the 3rd edition text. The fifth edition was published in 1789 ans the last published in Smith’s lifetime, again with no substantial changes (unlike Moral Sentiments, which Smith amended in its last edition in 1790, the year of his death).

These details from pp 61-64 of the General Introduction to the 2-volume Glasgow edition of Wealth Of Nations, published by Oxford University Press, and reproduced in exactly the same pagination by Liberty Fund (Indiana) at the bargain price of £10.95 (about US$20). This is the scholars’ edition par excellence, complete with the editors’ footnotes and comments.

So, for the price of a couple of cups of coffee and, perhaps, a bagel or doughnut, or slice of pecan pie or two, you get the text of a book that somebody just paid £66,000 (US$130,000) for in July 2007 and which cost somebody else £1.16s in 1776.

Thursday, July 12, 2007

Why Blame the Enlightenment for Modern Criminality?

I have problems with references to Adam Smith and the Scottish Enlightenment and Lee Harris linking them to the recent terrorist incidents in London and Paisely [NOT Glasgow].

I am not trying to be smarty pedantic, but Lee Harris makes a case about a serious criminal action in the 21st century and links it to some alleged disappointments about the Enlightenment in the 18th century. This surely is a highly tenuous string of weak links and stretched speculation?

Here is what Lee Harris writes in his article in City Journal (New York – or should I write Newark?), 11 July:

‘Mad Scientists’: The disturbing lessons of the Doctors’ Plot’

”Such, at least, has been the faith of the intellectual movement called the Enlightenment—a movement that owes much to the city in Scotland that was one of the sites of the failed terror attacks.

“It was at the University of Glasgow that the great Adam Smith taught. Like the other members of the Scottish Enlightenment, Smith believed in the power of education to free men and to improve human prospects. In his masterpiece, The Wealth of Nations, Smith argued that the state should educate the working classes not simply because it was the right thing to do, but also because it was prudent. For Smith’s close friend, the philosopher David Hume, an ignorant multitude was a dangerous multitude, because ignorance bred both superstition and fanaticism. A practical, universal education, grounded in the scientific or experimental point of view, was the best means of assuring the peace and stability essential to a nation’s prosperity and security. Those educated in science could learn to live in harmony with one another.

This Enlightenment model, which has worked quite effectively in Europe and the United States, as well as in other parts of the world, has always relied on an advanced elite that brings learning to the masses through universal secular education. Many have hoped that Muslim nations would adopt the same model, with the same results.”

Comment‘Glasgow’ airport is near the town of Paisley (2 miles) and 8 miles from Glasgow. The original ‘Glasgow’ airport was at Abbotsinch and was re-sited to its present location in the 1960s and kept its name, Glasgow Airport (a highly controversial affair at the time).

Its connection to the City of Glasgow by name does not mean that alleged ** terrorists are linked somehow, spiritually or otherwise to the Glasgow of the Enlightenment. The alleged perpetrators worked in Paisley at the hospital there and not in Glasgow.

At the time that Smith lived and worked in Glasgow in the 18th century it was a small town with a population of about 23,000; Paisley was a village, one of many in the surrounding country. Edinburgh was larger at over 50,000.

To the tenuous geographical detail, Lee adds speculation about the hopes of Enlightenment through education. I am not convinced that this is a fruitful line of thinking. Lee writes:

‘The Wealth of Nations, Smith argued that the state should educate the working classes not simply because it was the right thing to do, but also because it was prudent.’

Which is correct at one level and not at another. Adam Smith argues in Book V of Wealth Of Nations that the division of labour in the new work processes could make labourers ‘as stupid and ignorant as it is possible for a human creature to become’ (WN V.i.f.52: p 782). He did not make these points when extolling the virtues of the division of labour in Book I (chapters i-iii); he raised this issue in his chapter on the need for government to participate in a national education programme to provide a school in every village.

His rhetorical flourishes in this later chapter are directed at the influential readers in and around government who were already anxious about the violent events in the American colonies and were concerned about such unrest spreading to the motherland, especially among the ‘ignorant’ lower orders (whom privately were seen as of similar status to those the ‘colonials’ had rallied to rebellion against the King; people always see the worst in their enemies).

Knowing these people well, Smith directed his case along lines that would find sympathy among them. In modern terms, we would call it ‘spin’. Scotland already had ‘village schools’ in every parish, unlike England (it also had four universities to England’s two). But if legislators were not convinced by good arguments for education, then a tad amount of argument by ‘fear’ might be called for.

I think the less said about education being a harmonizing force the better. Leaders, legislators and political agitators (‘men of system’, Smith called them) in government from Smith’s time to this, most of them educated too, have a lot to answer for in their conduct, much of it falling well short of the standards expected by the Enlightenment. I can think immediately of the French-educated leaders of the Kymer Rouge in Cambodia, Dr Goebbels in Nazi Germany, on the left and right extremes; scores more in the democratic politics of the US, Britain, France, and South Africa, whose capacity for false doctrines, often contrary to good sense, is a norm not an exception.

That some medical students from the Middle-East, some of whom appear not to be well qualified, may have been associated with criminal events in for them a foreign country, has absolutely nothing to do with the Scottish Enlightenment, David Hume (whom we know visited Glasgow and its hinterlands in 1752), or Adam Smith, who taught there between 1751-64) and was a regular visitor afterwards.

It is also a bit impertinent to think that ‘Muslim Nations’ are lacking a secular education to make them – what? – ‘normal’. When more than half of educated US citizens believe in ‘creationism’ and versions of the earth being only 6,000 years old, reject evolution in terms of utter repulsion, and want to impose their creeds on schools (!) and government, I am not sure that Lee Harris has much of a case to argue for or much firm ground to preach to the ‘Muslim Nations’ about education as an antidote for ignorance.

** British law is rightly fussy about making judgments about criminal trials and people in them before the process has begun and been settled by verdicts. I live in Scotland and I am held to account for such action.